Financial Development and Innovation-led Growth: Is Too Much Finance Better?

Xiaoyang Zhu, Stylianos Asimakopoulos, Jaebeom Kim

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We show that the expansion of financial sector may hurt innovative activities and hence the innovation-led growth, using data on 50 countries over the 1990–2016 period. Countries with higher level of financial development are found to have a smaller positive or insignificant effect on innovation. The marginal effect of innovation on growth is a decreasing function of financial development. Using a dynamic panel threshold method we re-examine the possible non-linearity between finance, innovation and growth. We find that innovation exhibits an insignificant effect on output growth when credit to the private sector exceeds a threshold level of about 60% as a share of GDP. These results are not driven by banking crises, the long run effect of 2007–2008 financial crisis, or the ongoing European sovereign debt crisis.
Original languageEnglish
Article number102083
Pages (from-to)1-24
Number of pages24
JournalJournal of International Money and Finance
Volume100
Early online date19 Sep 2019
DOIs
Publication statusPublished - 1 Feb 2020

Keywords

  • Financial development
  • Innovation
  • Growth
  • Threshold effect

Cite this